REVERSE MORTGAGE INFORMATION: Tools, News and Resources to Help Seniors Decide

HUD requires independent Home Equity Conversion Mortgage (HECM) counseling for all reverse mortgage applicants. HECM counselors are required by federal law to provide information on the costs and financial implications of HECM loans, and on alternatives to HECMs that may be available to consumers. An unbiased source, they provide the following:

Have you considered All Your Options?

Have you looked into all your options? Have you seriously explored the other choices discussed on AARP’s website? If not, go and read all the pages listed there. They make you aware you could sell and move into less expensive quarters, you could rent or look for state based services to supplement your living expenses. Right now thats one of the bigger reasons folks are turning to reverse mortgages, their monthly living expenses have surpassed their monthly cash flow capabilities and with state based services also suffering, the reverse is a welcome option for those that qualify.

Are You Eligible?

a) Are you and all other owners of your home at least 62 years old?
b) Does each owner live in the home at least six months out of the year?
c) Is the home a single family residence, duplex, triplex, 4-unit residence, a condominium, or a planned unit development (PUD)?

If you answered “Yes” to questions a, b, and c, then most likely you are eligible. But only a HECM lender can determine for certain if you are eligible for a HECM.

If you answered “No” to question c, you may still be eligible if you live in certain types of manufactured housing, but not if you live in a mobile home. To see if your home is “manufactured” or “mobile” contact your lender.

Could You Get Enough Money?

Could a reverse mortgage give you the amount of money you would need to get from it? Use the to estimate how much you could get from a HECM loan. Here are some things to keep in mind: If you now owe any money on a debt against your home, you would have to pay off the full amount you now owe in order to get a reverse mortgage. But you could use money from the reverse mortgage to do that. For example, if you now owe $20,000 on a home equity loan and could get $100,000 from a reverse mortgage, you could use $20,000 from the reverse mortgage to pay off the home equity loan – which would then leave you with $80,000 from the reverse mortgage.

If you answered “Yes” to the questions above, then you can request a counseling referral via the and your advisor should provide you with a small list of approved counselors. Unfortunately, not all of those listed on the site are still providing all of their services.

Last year there were 107,000 reverse mortgages originated, this year the number of HECMs is on pace for over 110,000. In 2 years, that’s over 200,000 and that’s not including the fallout from those that had intended to qualify for the reverse mortgage but did not for various reasons, such as qualfying values on their homes, title or trust issues or those that decided to stop the process for other reasons. The problem now is the time it takes for someone to get a counseling session scheduled has increased to weeks in some cases and that is causing some consumers to stop the process altogether. These counselors provide more than reverse mortgage counseling, they are also offering all types of housing and credit counseling as well and it doesn’t take much to realize that their resources are completely tapped out. Last year, 264,989 troubled homeowners sought help from federally certified counselors, a 55% increase from the previous year according to a recent .

The borrowers must now pay for the counseling, it used to be paid for by the lenders but no longer. The costs cannot exceed $125. Some agencies offer free counseling, some offer a lower fee if paid upfront but almost all allow for the client to pay for the counseling at closing by using the proceeds from their reverse mortgage funds. All agencies are different so contact them to find out their policies. Getting the appointment with the counselor is still the biggest headache in this process and as mentioned above, it stops some from proceeding and its hard to explain away that issue.

Reverse mortgage advisors are to provide the client with a suitable number of HUD approved counseling agencies for their clients but not be involved in setting the appointments for the client. Some advisors will give their client a list of 3 agencies to call and will sit with the client during the setup of the appointment to make sure they are being properly taken care of. The counseling could take place in the counseling office or it can be done over the phone. Most take the phone counseling but the face to face counseling provides the client with a better understanding of their options and processes. After a successful completion of the counseling they are provided with a counseling certificate. That certificate goes to the broker or lender they have selected to do business with and then the lender secures an FHA case number based on that required certificate. Then and only then can any real processing begin on the client’s loan. They can’t order appraisal, inspection, title or anything until counseling is completed and the case number is secured. Some folks don’t realize there are many checks and balances in the process to protect the homeowner.

In 2006 we posted an article that they were in the process of updating the system.

HUD is not the only group to acknowledge the system may be failing some.

As the reverse mortgage industry expands and constantly introduces new (and confusing) products, some people are beginning to wonder whether reverse mortgages are destined to become the .

The same type of financial engineering and securitization that repackaged regular mortgages (once held by local banks) into exotic investment securities sold around the world is now fueling reverse mortgage growth. The financial alchemy worked extremely well with traditional mortgages. Investors exhibited an almost unquenchable thirst for these “safe” mortgage-backed securities (MBS). Yet it’s now clear that credit agencies, regulators and investors themselves did not always understand the investments or the underlying risks. (more…)

One of the lesser known facts about HECM reverse mortgages is that the insurance premiums the FHA charges more than offset the costs/risk the government takes on because of HECMs. In short, the government makes money money on each HECM reverse mortgage. Here’s a pertinent quote from a recent Congressional Budget Office (CBO) analysis of H.R. 1852 (“Expanding American Homeownership Act of 2007″) a bill pending in Congress which would, among other things, help expand the HECM program: More About H.R. 2895…

Fidelity Research Institute has issued a new report . The study is yet another thorough analysis highlighting the importance of permanent income streams in retirement. Although reverse mortgages are not mentioned in the report, several of the findings are very pertinent here.

Guaranteed income, according to the report, is simply income you cannot outlive. Traditional guaranteed income sources (social security, defined benefit pensions, etc.) are dwindling in importance and will be relied on less and less by future generations of retirees. The study notes that it will be critical for retirees (more…)

There is no question the most popular payment choice for HECM borrowers remains the HECM line of credit. Recent data from HUD shows that 94% of the 319,035 HECM loans originated from January 1990 through June 30, 2007 have either been straight lines of credit (81%) or credit lines combined with another payment form (13%).

The HECM line of credit option has increased in popularity along with the boom in reverse mortgages over the last year. At the end of March 2006 (when total number of HECMs stood at 188,000) the straight line of credit was the payment option selected by 78% of HECM borrowers. 92% of borrowers at that time chose either a straight line of credit or a line of credit combined with the tenure or term payment options. (more…)

There’s no question that one of the main reasons for the rapid rate of growth in the reverse mortgage industry has been home price appreciation in “hot” areas of the country. Over the last several years, the top markets for HECM reverse mortgages have consistently been the California and Florida markets.

These markets also dominate the index of reverse mortgage friendliness, a simple measure that compares the interest rate on a reverse mortgage with average home appreciation rates. It’s a straightforward notion: when home price appreciation rates match or exceed borrowing costs, there is added incentive to tap home equity via a reverse mortgage. The homeowner can use the funds for living expenses and still grow the value of the estate. Refinancing a reverse mortgage is also a more palatable option when home values are soaring.

But what about when home values stagnate or decline (more…)

We came across a new study that looks at some of the behavioral reasons why people tend not to choose lifetime payment (annuity) options – despite the fact that, more often than not, this would be the “rational” thing to do. The study comes from the Pension Research Council at the University of Pennsylvania’s Wharton School.

It’s an academic paper (a difficult read – formulas and all), but we pulled from it some interesting points that may be useful in helping reverse mortgage borrowers better understand the framework within which they make their decisions:

• Mental Accounting – According to the study, the most important reason for annuities being unpopular is mental accounting. Mental accounting refers to the tendency to view financial decisions in isolation rather than within a broader framework of total wealth. People tend to view the lifetime payment decision as an isolated gamble (“will I live long enough to recoup my initial investment”) rather than as a component of a larger retirement funding picture. The study notes:
  

  “If annuity outcomes are segregated from their impact on total retirement spending, then purchasing an annuity appears to be a gamble which increases overall risk, rather than a form of insurance which can reduce risk. In order to combat this problem, annuity marketers and financial advisors need to better frame the annuity as longevity insurance. Having longevity insurance in the form of an annuity should reduce the need for precautionary saving and thus allow annuity holders to consume more in retirement.”

• Availability Heuristic – People are prone to assign greater weighting to “more easily imagined” factors in their assessment of probabilities.
  

  “In the case of annuities, the availability heuristic may play a role in overemphasizing the possibility of dying shortly after the annuity is purchased, because there are many ways an individual can imagine his imminent demise. The likelihood of greatly outliving one’s life expectancy may, on the other hand, not have as much salience, except in those cases where family members or other acquaintances have survived to very advanced ages. This exaggeration of the likelihood of early death would make annuities appear worse…”

• Fear of Illiquidity – People often feel the need to have quick access to cash to take care of emergency needs. With lifetime annuity plans, liquidity is sacrificed in exchange for regular lifetime payments. The study notes:
  

  “(S)imilar to the behavioral mistakes that individuals make when assessing probabilities of dying at early ages, it is quite possible that individuals also overstate the likelihood of catastrophic events that may require sudden spending that could not be met after annuitization.”

In November 2006,we reported on a Boston College study showing that HECM borrowers would best be served by choosing the “lifetime tenure” payment option – an option guaranteeing regular monthly payments to the borrower until loan termination (death, sale of home, etc.). Yet, only about 5% of HECM borrowers actually chose this payment stream. The new Pension Research Council study points to some of the reasons why and can give borrowers valuable insights into their decisions.